The economics of the fading middle class

Sept. 20, 2013 3:27 p.m.

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Joe Sergi of Garden Grove practices for his plumbing arc-welding certification at the union-operated Apprentice & Journeyman Training Center in Compton. Apprentices from Orange and Los Angeles counties are encouraged to learn a variety of skills so they will always be in demand. KEVIN SULLIVAN, ORANGE COUNTY REGISTER

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Joe Sergi of Garden Grove practices for his plumbing arc-welding certification at the union-operated Apprentice & Journeyman Training Center in Compton. California's middle class has seen stagnant or even declining incomes during the past three decades. That's particularly true for blue-collar tradespeople such as plumbers, who once could count on solid middle-class lifestyles. KEVIN SULLIVAN, ORANGE COUNTY REGISTER

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Becky Otten, center, associate professor at Cal State Fullerton's school of nursing, demonstrates the "room of horrors" in the school's simulation room. Nursing students Wendi Sellers, left and Kristen Miller are challenged to find multiple mistakes in the presentation of the patient. Though many professions have seen falling salaries in California, nursing has been one of the exceptions. JEBB HARRIS, ORANGE COUNTY REGISTER

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Zachary Armendariz of Palmdale, left, and George Covarrubias of Covina go over plans in their drafting class at the union-operated Apprentice & Journeyman Training Center in Compton. KEVIN SULLIVAN, ORANGE COUNTY REGISTER

Joe Lopez of Long Beach looks over plans in his drafting class at the union-operated Apprentice & Journeyman Training Center in Compton. KEVIN SULLIVAN, ORANGE COUNTY REGISTER

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Becky Otten is an associate professor at Cal State Fullerton's school of nursing. Middle-class incomes in California have stagnated over the past three decades, but nurses' salaries have bucked that trend. JEBB HARRIS, ORANGE COUNTY REGISTER

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Faucets surround students as they study for the final exam in their service and repair class at the union-operated Apprentice & Journeyman Training Center in Compton. At the training center, run by the Southern California Pipe Trades Council, apprentices from Orange and Los Angeles counties are encouraged to learn a variety of skills so that they will always be in demand. KEVIN SULLIVAN, ORANGE COUNTY REGISTER

Joe Sergi of Garden Grove practices for his plumbing arc-welding certification at the union-operated Apprentice & Journeyman Training Center in Compton. Apprentices from Orange and Los Angeles counties are encouraged to learn a variety of skills so they will always be in demand.KEVIN SULLIVAN, ORANGE COUNTY REGISTER

House Republicans have their own plan for boosting the economy and the middle class. Key items: "a simpler, flatter tax code without all the loopholes" and federal budget cuts championed by Rep. Paul Ryan, R-Wis. Just as Obama's "grand bargain" appears dead on arrival in the Republican House, the Republican proposals appear dead in the Democratic Senate and White House.

— Ronald Campbell, Orange County Register

Other solutions to the shrinking middle class

Expand early childhood education. Researchers have found that wealthy children do better in school than poor children. That's the logic behind Head Start – to even the odds. But recent research has indicated that well-born children are pulling farther ahead. Investing in early childhood education and quality child care is "probably the single best investment we could make that would narrow those disparities down the road," said Stanford education professor and sociologist Sean Reardon.

Create a state-sponsored venture capital fund modeled on similar funds in New York and Massachusetts. UCLA economist Christopher Tilly acknowledged the idea "is controversial because you're saying government can pick winners." But in fact the government has picked winners, sometimes very big winners, such as its early sponsorship of the Internet. And those choices can generate well-paying jobs.

How we did the numbers

Comparing slaries by race, education, occupation

Although people are better educated and more productive than ever, incomes are stagnating.

The problem goes back 20 years, to the loss of hundreds of thousands of high-paying, blue-collar aerospace jobs after the Cold War.

But the roots of the middle-class crisis lie even deeper.

The 1980s was the last decade of widely shared prosperity. That was the last time the poor, the middle class and all but the wealthiest Californians saw their wallets grow fatter. In fact, poor and lower-middle-class residents did relatively better during the '80s than everybody else.

Since then, the state has reshuffled its economic deck.

Californians are “working harder to stay in the same place,” said Deborah Reed, a social scientist at Mathematica Policy Research in Oakland.

This is the Great Reshuffle. Its effects are all around you.

Data collected by the U.S. Census Bureau puts a ruler on what has happened in California over the past few decades:

Median household income, the broadest measure of what we make, has declined by 2 percent since 1989 after adjusting for inflation.

The top fifth now make 44 percent more than in 1989 while the bottom fifth make 14 percent less.

Income inequality is dictating where we live. Regions that once had a mix of classes increasingly tilt one direction or another.

High school graduates are falling far behind college grads in the race for money. In 1989 college grads made 50 percent more than high school grads. Now they make twice as much.

“The issue of inequality in America … is not what happens to (Facebook founder) Mark Zuckerberg,” said UC Berkeley economics professor Enrico Moretti. “The real difference is what happens to those who have a college degree and those who don't.”

When baby boomers finished high school a generation ago, they faced a choice: Go to work immediately or hit the books for four more years of college. For millions of Californians back then, skipping college in favor of work was an economically responsible decision. Today it is reckless.

Experts and politicians who have studied the crisis of the middle class have many ideas for solving it: Increase taxes. Cut taxes. Boost spending on “green jobs.” Slash spending. Boost the minimum wage. Overhaul immigration laws.

But there is consensus on only one idea: a better-educated workforce.

The path to the middle class now begins in college.

BLUE-COLLAR DECLINE

When Ricardo Rosas quit a factory job in 1972 to become an apprentice plumber, plumbers were blue-collar princes. At the time a typical plumber in California earned almost as much as a high school teacher – $50,000 in today's dollars.

In 1974, midway through his apprenticeship, Rosas bought a house in Orange near Anaheim Stadium. His wife, Rosemary, stayed home raising their two sons. They could afford it.

When Rosas retired this past April 1, plumbers were princes no longer. The typical plumber's pay has declined by more than a third since 1970, to $32,000.

Rosas came of age in a strikingly different world from ours.

In the early 1970s, when he became a union plumber, California high schools still offered shop classes. Men like Rosas, men who were good with their hands, could still make a living almost as rewarding as college men did.

Back then, electricians, machinists and plumbers were paid upward of $45,000 a year in today's dollars, enough to land a family in the lower middle class on a single paycheck.

The Great Reshuffle introduced technology that made their jobs faster, reducing hours. That whittled paychecks for skilled craftsmen by 25 percent over the past generation.

“Before, you had a job that took 40 guys. Now it takes 35,” Rosas explained. “Every job goes a lot faster.”

When Rosas began, he worked with copper pipe. Today plumbers use plastic pipe, a much lighter, simpler material. Plumbers' professional cousins, pipe fitters, once assembled boilers from pencil-lined drawings. Today they work from computer-aided designs.

Rosas coped with all the changes by breaking one of the unwritten rules of his trade. Instead of sticking strictly to plumbing, he also became certified as a pipe fitter so he could work industrial projects when plumbing jobs were scarce.

That kept him busy. In a 40-year career spanning five downturns and the Great Recession, Rosas got 381/4 years' credit toward his pension.

Rosas, who teaches one night a week for the Southern California Pipe Trades apprenticeship program in Compton, urges students to follow his example.

“I preach to apprentices, ‘Get all your certifications.'”

Rosas is the first to say that he has been fortunate. He and his wife are settling into a comfortable retirement. Their two sons are grown, and one of them has become a plumber. They have a granddaughter.

But he looks back at the foundations of his life – the wood shop, auto shop and welding shop classes in high school that prepared him for his career, the home in Orange that he bought for $32,000 in 1974 ($151,000 in today's dollars), the steady paycheck that allowed Rosemary to stay home raising the boys – and he says none of that would be possible today.

“I would never ever want to be 25 in today's world,” Rosas said.

DEVALUED DIPLOMA

In the 1970s, a high school diploma and some job training was enough for a person to grab hold of the middle-class dream.

Technology helped change that. It demanded higher education – the more the better.

A few numbers help explain what happened.

In 1979, high school graduates in California made an average of $47,000 in today's dollars. By 2011 they were making just $38,000. College grads, who made $20,000 more than high school grads in 1979, were almost $40,000 ahead by 2011.

Instead of focusing on “the 1 percent” at the top of the income pyramid, said Moretti, the UC labor economist, the public needs to pay attention to the vastly larger group without a college degree. In California that's 30 percent of the labor force – 5 million people.

They are falling out of the middle class.

Moretti points to a couple of reasons.

First is the made-in-California tech revolution. Computers have made the workers who know how to use them far more productive than those who don't.

Go to a factory, Moretti said, and you'll see fewer workers than you did decades ago. Employers have cut the number of blue-collar workers in half since 1979 while doubling the number of engineers. Bosses are willing to pay more for more productive workers.

The second factor, Moretti said, is globalization.

Just as blue-collar workers are replaced by better-trained (and better-paid) technicians, they are losing jobs to lower-paid foreign competitors.

Consider customer service representatives. Never more than a phone call away, they have lost much of their earning power as companies have opened call centers in English-speaking foreign countries to make service cheaper, more convenient, more efficient. In 1979, the median salary for California-based customer service reps was $42,000 in today's money. Today it is $31,000.

NURSES' VOICE

The people who have thrived during the Great Reshuffle hold jobs that demand a lot of education, jobs that can't be shipped overseas. Jobs like nursing.

Becky Otten is a registered nurse, among the last generation of nurses to be trained apprentice-style in a hospital. She graduated from St. Vincent College of Nursing in 1971 and immediately went to work at the college's parent, St. Vincent Medical Center in Los Angeles.

A few years later the college closed, giving way to fast-growing community college nursing programs. The old model of nursing education – and the loyalties to a particular hospital that it nurtured – was breaking down.

In the early 1970s, when Otten started, a typical RN in California made less than an auto mechanic or a carpenter, about $40,000 in today's dollars. Today a typical nurse makes about $80,000. Some make six figures.

In 1970 more than a third of California nurses had not attended college, according to the census. By 1990, less than 5 percent had not. Today less than 1 percent have not.

Two years after Otten became a nurse, the hospital asked her to manage a unit. She accepted but soon realized she needed more training.

She went back to college for a bachelor's degree in health administration. In the '90s she received a master's degree in nursing education and began teaching. A decade later she received her doctorate.

Today she heads the four-year nursing program at Cal State Fullerton.

Otten remembers when nurses wore starched white dresses with maid's caps and had to give up their chairs if a doctor entered the room. Today some RNs run hospitals.

The nurses union began growing in the 1980s. Before that, Otten said, “nurses were known to accept what they were given. ‘All right, you want me to take 14 patients, I'll take 14 patients.'”

In the early 1990s, with the end of the Cold War, laid-off defense workers seeking stable employment entered nursing. They helped bring technology to the bedside, Otten said.

“Nursing started to find its voice,” she said.

By then, the population was beginning to age, the health care sector was growing and its leaders were realizing that they needed more nurses – and that nurses were far better-educated and more technically competent than they had ever been.

Hospitals were forced to compete for nurses. That drove up wages. For a time in the early 1990s hospitals offered signing bonuses of $2,000 to $20,000, Otten recalled.

While wages for many occupations stagnated over the past 40 years, wages for RNs doubled after adjusting for inflation. Nurses' wages even rose during the Great Recession.

At a time when most members of the middle class struggled to hang on to what they had, nurses moved up. In 1979, 29 percent of California nurses lived in upper-middle-class or upper-class households. By 2011, 71 percent did.

TECHNOLOGY'S TOLL

Next time you go to the multiplex, see if you can spot when the movie reels change.

Not so long ago, a movie projectionist was a skilled worker with a paycheck to match. The 1970 census counted 4,300 projectionists in California making the equivalent of $50,000 in today's dollars. That was a solid middle-class income.

There are now fewer than 400 full-time movie projectionists in California. Median pay: $25,000.

Scores of occupations have suffered similar fates, losing jobs and pay to technology or changes in the labor market:

Truck drivers in the 1970s and early 1980s were solidly middle class. Fierce competition has driven down their wages, squeezing many of them out of the middle. Median income fell from $43,000 in today's dollars in 1979 to $29,000 in 2011.

Transportation ticket reservationists saw their jobs transformed by the Internet. Customers increasingly made travel plans via mouse click, with humans needed only as a backstop. Median income fell from $49,000 to $30,000.

Auto mechanics managed to boost their income slightly from 1979 to 2006, partly because about a third of mechanics quit or retired during the '90s. But they were among the hardest hit by the Great Recession, as customers delayed repairs to save money. Their median income plummeted during and after the recession, from $39,000 in 2006 to $24,000 in 2011, far below where it stood in 1979.

BIG WINNERS

The Census Bureau keeps tabs on hundreds of occupations in California. Even before the Great Recession struck, workers in nearly half of these occupations had endured a pay cut of 10 percent or more.

But people in dozens of occupations thrived during the past three decades. Among the biggest winners: those in health care, science, technology and engineering.

In 1980, in the early years of the personal computer, about 30,000 Californians made their living as computer software developers. By 2011 their ranks had more than quadrupled to nearly 140,000. Median pay rose from $58,000 to $99,000. They've moved from the middle to the upper reaches of the upper middle class.

Engineers have fared well, despite deep layoffs that cost tens of thousands of jobs in the post-Cold War recession of the early 1990s.

The proof is in their paychecks. Paid about $70,000 a year in 1979, they typically make about $100,000 a year now. Average inflation-adjusted raises range from 23 percent for aerospace engineers to 57 percent for chemical engineers.

Health care professionals have done especially well over the past three decades. Since 1979, median pay has risen 85 percent for physicians and 75 percent for registered nurses.

But they are far from the only beneficiaries. Occupational therapists, physicians' assistants and even veterinarians have all seen their pay double since 1979. Pharmacists got a 73 percent increase, respiratory therapists 61 percent. Managers of medicine and health occupations took home a 33 percent pay increase.

NOT SO EASY

In 1977, the University of Redlands laid off its philosophy department chairman.

Bob Hunt decided he was done with philosophy, done with academia and done with Redlands. He and his wife, Nancy, moved their family to San Clemente, where they had spent summers, and took a chance on the real estate business.

Fortunately, he now says, the market was strong enough “that even a new guy could make a living.”

But it quickly got hard. At the end of the 1970s, Federal Reserve Chairman Paul Volcker cranked up interest rates to whip chronic high inflation. It would be years before cheap mortgages returned. Cheap housing prices never returned.

“People think it's an easy way to make money,” Hunt said. “They only see and hear the success.”

Look at a chart of California home prices over the past 40 years, and you can see his point. With two years-long exceptions – the post-Cold War recession in the 1990s and the Great Recession – home prices have gone up steadily, sometimes rapidly, far outstripping inflation.

You'd think the people selling real estate would all be rich.

The numbers tell a different story. The typical full-time real estate salesperson in California made $47,500 in real dollars in 1989 – and just $23,600 in 2011, according to the census. That's the mean, or mathematical average. The median salesperson, the man or woman in the middle, made only $5,200 in 2011.

Real estate is “a star system,” Hunt said. Like Kobe Bryant in sports and Bruce Springsteen in music, an outsized percentage of the money in real estate flows to “the stars who work really hard.”

Before you ask, Hunt said, “I'm not a star in the real estate business. I'm talking about the people who have a million dollars in real estate commissions.”

But Hunt has done well. He survived the double-digit mortgage rates of the early '80s and repeated booms and busts. He now runs 150-agent Keller Williams OC Coastal Realty in San Clemente.

Still, he said, “you're working twice as hard to make half as much.”

DOWN AND OUT

California is a bad place to be poor. Even cities considered low-cost by California standards, such as Riverside and San Bernardino, have housing costs above the National Association of Realtors' nationwide average.

During the past 30 years, lower and lower-middle class Californians have had to cope with a double-squeeze: declining incomes and rising housing costs.

The lower and lower-middle classes survived California's housing market by moving down and moving farther out.

The poor also began moving away from the historic urban centers, Los Angeles and San Francisco.

The shift was especially pronounced in San Francisco, where blue collar and high culture had mixed for generations. In 1980, a quarter of the city's population was lower-income. By 2011, just 19 percent was, as historically working-class neighborhoods gentrified.

Los Angeles County was home to a third of California's lower- and lower-middle-class households in 1980. By 2011, the rate was under 30 percent.

These changes, small when measured county by county, add up to millions of people.

Over the past three decades some 500,000 lower-income California households and an additional 560,000 lower-middle class households moved into Riverside and San Bernardino counties.

The San Joaquin Valley grew even faster, largely spurred by an influx of poor and lower-middle income residents. The valley, with 10 percent of the state's households, has 14 percent of its lower income and 12 percent of its lower-middle income.

They have created extraordinary commutes: middle-class lifestyles anchored by jobs on the coast and homes 60 to 100 miles inland.

There are many such “super commutes” between home and job– Moreno Valley to Orange County, Palmdale to L.A., Tracy to Silicon Valley, Vacaville to San Francisco.

Chris Hoene, executive director for the California Budget Project, a nonprofit that analyzes state fiscal policies, said that in the long run these super commutes are not sustainable.

“You can't just have your metro areas as wealthy enclaves,” he said. If people can't find housing near their jobs, “they'll find that elsewhere. … The question is, do we create clusters of economic activity where they're moving to?”

AT THE TOP

While the two low-income groups lost money and the “middle middle” stagnated, the upper income groups gained. This was partly the product of the economy's shift toward work that demanded more education – think software developers and engineers instead of truck drivers – and partly because of the rise of the managerial class.

For example, in the past three decades the California economy created work for 51,000 new management analysts, 76,000 financial specialists and 96,000 chief executives. Most of these jobs paid upper-middle-class or upper-class salaries.

The gap between the middle of the middle class on the one hand and the upper-middle and upper classes widened in the middle of the last decade. While the Great Recession hurt all income groups, it hit the lower groups proportionately harder, thus widening the income gap.

Internal Revenue Service statistics help show how well the wealthiest Californians are doing.

In 2011, the latest year available, the 700,000 top-earning households in the state reported combined income of $370 billion. That's twice as much as the bottom 11 million households.

The wealthiest Californians of all, 45,000 households making $1 million or more, made a combined $146 billion in taxable income in 2011, roughly as much as the 9 million poorest households.

SCHOOL RULES

The future of California's middle class rests primarily on education.

“How do you retrain because jobs don't last as long as they used to?” UCLA economist Christopher Tilly asked. The answer, he said, is a broad range of higher education, from community colleges to graduate schools.

The state and federal governments should increase financial aid to make higher education more affordable to the middle class, Tilly said.

“College is still one of the best investments you can do,” said Moretti, the UC Berkeley economist. It's better than the stock market, better than real estate, generating lifetime returns of about 5-to-1. “Yes, college costs have increased dramatically, but college benefits have increased even more.”

Manuel Pastor, a sociologist at USC, said community colleges have a crucial role to play.

“Not every kid will go to college,” Pastor said. But even if they're going to a traditional blue-collar job, they'll need training – more training than their counterparts a generation ago.

He cited the example of Siemens, the German industrial giant that partnered with community colleges to train workers for its North Carolina factories.

California's demographics pose a particular challenge for the middle class.

Sometime this year Latinos will become the state's largest population group. Sometime in the next decade or so, Latinos will become the largest component in the workforce. That has big implications for California's economy and for the middle class.

“The state of California is really tied to how minorities do,” said Jody Agius Vallejo, a USC sociologist who has studied the Latino middle class. “We need educated Latinos to replace aging baby boomers when they retire.”

That could be a tall order.

Among working-age white Californians, 48 percent have a college or graduate degree. The percentage among Asians is even higher: 59 percent. The percentage among Latinos: just 14 percent.

But Dowell Myers, a USC demographer, said this statistic hides more than it reveals. Myers, who studies Latino immigrants and their children, notes that the statistic includes about 1.5 million immigrant workers who came to California as poorly educated teens or adults.

Look at their kids, he said, U.S.-born Latinos, and you get a more hopeful picture.

There are about a million native-born Latino workers in California, and 22 percent of them have completed college. That's double the 1980 percentage.

“We need at least 30 percent (with college degrees),” Myers said. “They have this incredible upside potential if we can expand their educational attainment.”

Vallejo said two important steps to boosting Latino education would be reversing the recession-era cuts to public colleges and providing more support to first-generation college students.

While more education would help people stay in the middle class and open pathways for people who are not yet in it, experts say more needs to be done.

“You need to shore up the bottom of the economy so that people can't fall out,” Pastor said.

He and others recommend boosting California's minimum wage, last raised to $8 in 2008. It buys less, adjusted for inflation, than the minimum wage when Ronald Reagan was president.

Though it would directly affect only the lowest-paid, lowest-skilled workers, a minimum wage boost “ripples up through the wage distribution,” Tilly said. Raising the minimum wage forces employers to become more productive, and that in turn increases opportunities for better-educated workers, he said.

Another step to shore up the bottom: reform immigration.

California has more people here illegally than any other state – about 2.6 million, according to the Pew Hispanic Center. That gives the state an outsized stake in the immigration debate. And it also affects the economic fortunes of the middle class from above and below.

It affects the middle class from above because hundreds of thousands of potential members of the upper-middle class and upper class – foreign-born software developers and corporate executives – could gain entry visas and eventual citizenship.

It also could provide legal protection to about 1.3 million undocumented workers in California who now labor in the underground economy. Their emergence from the shadows would set a floor on pay and working conditions.

It also, according to a May study co-authored by Pastor, would propel currently undocumented workers into regular jobs and give the state economy an annual boost worth $4.5 billion to $7.9 billion.

The challenge for policymakers is to end decades of stagnation for the middle class, particularly for those who lack a college degree.

“The people who tend to think this is a hopeless situation aren't looking at history,” Pastor said. “This is not a hopeless task.”

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